Taxes
Thinking of leasing a car for your business instead of buying one outright? Here's how you deduct car lease payments from your tax return as a sole trader and as a limited company.
How do I deduct car lease payments as a sole trader?
As a sole trader, you can deduct the business proportion of your actual costs or apply HMRC's approved mileage rates to your business mileage. The second method is simpler, but you can only do it if you're not VAT registered. You need to register for VAT if your yearly turnover is over £85,000.
Once you pick a method, you have to stick with it for as long as you have the car. You can't switch from one method to the other.
In either case, you'll need to keep an accurate record of your business mileage. You can do this manually, for example by logging your business drives on a spreadsheet. Or, even better, use an app like MileIQ. This automatically tracks your drives and lets you categorise them as business or personal.
How to deduct actual car lease costs:
- Step 1: Add your car lease payments plus other running costs such as petrol and insurance to get your total annual cost. Remember that in the UK, the tax year runs from 6 April to 5 April.
- Step 2: Find out the business proportion of your costs. To do this, tot up your business mileage and divide it by your total mileage for the year. Multiply the answer by 100 to get a percentage.
- Step 3: Multiply your actual car costs by the percentage in step 2.
- Step 4: Using the Vehicle Certification Agency's online tool, find out your car's CO2 emissions. If they're over 130g/km, deduct a further 15 percent from the answer in step 3. This is called the lease rental restriction. It applies to cars, but not to vans. The government intends to bring it down to 110 g/km as from 1 April 2018.
Deducting actual costs: Example
Let's say you've leased a car for £200 per month. Your lease payments include road tax, servicing and your annual MOT.
In 2017 / 18, your insurance cost £300 and you spent £3,000 on petrol. This means the total cost of your car lease was (£200 x 12) + £300 + £3,000. So, £5,700 in total.
During the year, you made 12,000 miles. 6,000 were business miles, while 6,000 were personal miles. So, the business proportion of your car lease costs is (6000 / 12000) x 100, or 50 percent.
The car emits 135g/km. This means you have to deduct the 15 percent lease rental restriction.
You can, therefore, deduct 35% of your actual car lease costs from your tax return. In other words: £1,995.
